The Best International Robo-Advisors
There is no such thing as an ‘international’ robo advisor. Many robo advising firms accept international clients, but they must still operate according to the financial rules and regulations of the country in which they are based. Which is the best for non-US citizens? In this international robo advisor guide, we go through it all.
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One of the best things about robo advisors (and online brokerages in general) is that anyone can trade virtually anywhere they want, whenever they want. With robo advisors, a person living in California can open a brokerage account in Shanghai and monitor their investments on the other side of the world.
You might be wondering if there is such a thing as international robo advisors; that is, robo advisors that are not based in any specific country and are free from regulations.
Unfortunately, there is no such thing as an international robo advisor in this sense. All robo advisors are legally domiciled in some country and, while they can take clients from other countries, they must abide by the financial regulations of the country they reside in. Any “international” robo advisor that claims it is free from international regulations regarding trade and finance is not to be trusted.
Here is an example of how this works. Say that Bob lives in Canada and he has a robo advisor account with a firm that is based out of Australia. Bob will have to pay taxes on that money based on tax law in Australia, not Canada.
Moreover, Bob’s assets must be traded and managed in a way that complies with Australian financial regulations. Whenever Bob makes a withdrawal, the amount will be taxed in accordance with Australian tax brackets.
Depending on your country of citizenship, you may also be required to pay extra taxes on funds from a foreign broker account. For instance, in the US, traders must pay federal income taxes on income they generate from overseas, along with any taxes you must pay in the country in which your brokerage account is stationed.
There are many different ways to get around these laws and lower your own tax burden, but in general, you will have to abide by both countries’ sets of rules at the same time.
How Should I Invest in International Stock?
Investing in international stock can be a good idea as a means to diversify your portfolio. In some cases, investing in foreign stock will allow you to take advantage of laxer financial laws.
Given that the US makes up about 51% of the world’s stock volume, you might think it would be a good idea to make your portfolio ratios match with 51% of your money in US stock and the other 49% in foreign stock. This is a bit too aggressive, however.
Most financial experts recommend that if you are going to invest in foreign stock with a robo advisor, you should only allocate about 20%-25% of your funds to foreign stock. International markets usually are more volatile than domestic markets, so any higher of a ratio might expose yourself to unnecessary risk.
A 20% allocation would give you a proportion large enough to have an effect on the overall value of your account, but not so much that the value would tank if those investments did poorly. Whatever you do, don’t go back and forth between a lot of exposure and little exposure. That is a sure-fire way to be led to poor investment decisions.
Are you a fan of automated investing? Check out our list of the best robo advisors.
International Investing and ETFs
Robo advisors are passively managed so if you are investing overseas, you want something worth the risk. In general, we would say the best option for overseas investing, at least initially, is to buy into low-cost ETFs with low expense ratios.
Robo advisors in every country have access to a listing of ETFs traded in local markets. Indexed ETFs track the index of some specific stock exchange so they are a smart choice for passively managed assets.
The best part of ETFs is that they give easy access to global markets. So you can invest using a robo advisor from a country that has low capital gains tax rates and invest in shares that are traded on a global market. If you do choose to invest in ETFs, make sure you research the costs, managing fees, and taxation issues.
International Investing and Taxes
A few words on taxes and international investing. As of 2020, the US is the only major country that requires citizens to pay taxes on any foreign source of income, even if the citizen is not currently living in the US. If you are working abroad, the IRS allows you to claim up to $102,100 of your foreign salary tax fee. If your foreign salary is higher than this amount, you will have to pay taxes on the remainder.
However, the US charges US tax rates on capital gains no matter where you live additionally, the country in which the firm is located will also take a portion in taxes. This double tax might sound draconian but fortunately, the US has something called a foreign tax credit, the foreign tax credit allows you to use a portion of those foreign taxes to offset your domestic tax liability.
If you own holdings in a foreign country, your firm should send you a 1099-DIV or 1099-INT which has a record of how much of your earnings were withheld by the government. You can submit these forms to the IRS and claim them as a tax credit or as a deduction (if itemized).
If you opt for a tax credit, then you can take the amount directly off your tax liability. So for example, a $500 credit translates into $500 of savings on taxes.
Taking a deduction is a good idea if doing so would drop you an income bracket which means you’d have to pay a lower tax rate. The exact amount of the credit you can claim depends on how much you would have to pay on that income under US law.
If you end up paying more foreign taxes than your US liability, then the maximum credit you can claim is the US tax amount. However, you can take any remainder and carry it over to the next year.
Interested in saving for retirement? Review our best brokers for roth IRAs.
Best Countries for Robo Advisors Outside the US
One of the most effective means of foreign investing is putting money in foreign stocks in countries that do not mandate taxes on capital gains. That means that your investments will grow tax-free in that country, which can be a huge benefit if you live in a country that has higher taxes on capital gains. For example, Europe has a number tax-saving options when it comes to robo advisor investing. Here is a list of a few countries with robo advisors that are very friendly for international investors:
Robo Advisors in Switzerland
Switzerland has long been a hotbed of economic activity and is one of the world’s most renowned banking centers. In Switzerland, capital gains are not subjected to taxes and there are no taxes on the trading of securities.
Gains made from selling private property are also not taxed. Switzerland’s tax authority, the ESTV, does tax gains on other kinds of investments, but the rate of taxation goes down the longer you hold onto the security.
Some of the most popular Robo advising firms based out of Switzerland include:
- True Wealth
- Descartes Finance
Switzerland is a very attractive destination for foreign investments. Switzerland has been continually rated as the world’s most competitive economy by the World Economic Forum’s Global Competitiveness Report and its economic activity is supported by an excellent infrastructure and highly educated workforce Switzerland has one of the highest GDPs in the world.
Even better, thanks to this prosperous economic activity. Switzerland manages to keep low tax rates. The Swiss government is divided into different “cantons” that have relative autonomy to determine tax matters.
The Swiss government offers special treatment on profits generated by qualified shareholdings. The legal infrastructure is transparent and very friendly to business activity.
Switzerland’s business-friendly environment extends to robo advisors too. All funds managed through robo advisors in Switzerland are held through the Saxo bank and have the same government depositor protection as those held in other banks. That means all funds deposited with a Swiss robo advisor will be backed up in case of brokerage failure.
Robo Advisors in Hong Kong
Hong Kong has been named the “freest economy in the world” and is one of the best places for investors. Hong Kong is a city built on finance and has bankers and professionals all over the world.
Hong Kong does not tax capital gains on investments and trading on options are free from capital gains taxes. The only exception to these rules is shares given to employees that are taxed as income at a flat rate.
Some popular robo advisors in Hong Kong include:
Since gaining independence in 1997, Hong Kong has attracted interest from investors worldwide. This small island principality has a resilient economy that weathered both the Asian financial crisis of 1997 and the 2008 global recession.
The Hong Kong Stock Exchange is the world’s fifth-largest stock exchange and the city has the largest initial public offering market in the world. In 7 Hong Kong residents are millionaires and the biggest asset class in the Hong Kong market is real estate.
We should mention a few things here though. Hong Kong recently (2018) passed laws and regulations meant to determine the acceptability of sales by automated advisory platforms, including robo advisors.
Online advisory platforms must be registered or licensed with the Hong Kong government. The HK government requires stringent requirements on disclosing risk assessments, equity derivatives, and fund structures.
None of these rules are regulations on robo advisor activity in itself though, Securities traded by robo advising firms will still be free from capital gains taxes and any options traded on robo advisors are similarly free from taxes on gains.
Moreover, Hong Kong has a rapidly developing automated investment sector and many experts think that a robo advising boom is close within the next few years. Several robo advisors offer trading of Honk Kong ETFs which are a great way to diversify with securities that trade on US markets.
The one worry is recent volatile sentiment in Hong Kong relating to a 2019 proposal that would allow the Chinese government to extradite Hong Kong residents and foreign nationals to stand trial. The proposal set off chains of protests though has been modified. If the bill passes, the worry for foreign investors is that it could affect US-Hong Kong relations.
Robo Advisors in Singapore
Singapore is a particularly attractive destination for international investors due to its competitive incentives for business activity and its small jurisdiction and lax capital flow laws. Like the other countries we have covered so far, Singapore does not implement a capital gains tax on securities trading.
Singapore has one of the fastest developing markets in the entire world and has close geographic access to Asia which is also poised to erupt in the coming years.
Some of the more popular robo advisors domiciled in Singapore include:
- OCBC Roboinvest
Singapore thrives due to its massive financial sector which makes it an extremely popular destination for foreign investors. Singapore has a strategic maritime location that links it with over 120 countries through 600 ports. Capital pooled from Singapore’s markets funds more than 4 billion people in the world, over half of the world’s population.
Like many global financial centers, Singapore is very friendly to business activity. It has over 20 free trade agreements with 31 trading partners. The low corporate tax rate of 17% has made it home to more than 10,000 multinational companies.
The Singaporean government has also recently passed legislation aiming to make it easier for automated investing firms to provide their services. Digital advisory providers can get licenses even if they don’t meet the typical SFA requirements and they are required to obtain a smaller amount of information on individual clients than other advisory services.
The government has also pledged to combat the unique risks of digital advising business models like cyber threats and bad algorithms. It seems that Singapore’s government is extremely friendly to the idea of automated investing and are dedicated to making it a more friendly environment for them to operate.
Robo Advisors in Belgium
Another country in Europe, Belgium is one of the few countries in the EU that does not have a capital gains tax. Investments are generally free from capital gains taxes, though there are certain rare situations where they may be required.
Keep in mind that Belgium is a high tax country by many other metrics, but it has the lowest capital gains tax of all EU member states. The only other EU member-state with similar tax legislation is the Netherlands which does not tax investment returns but does have some form of wealth tax.
- Bolero Matti
Belgium is ranked the 48th freest economy in the world and has a stable and open market with a variety of investment opportunities. Belgium does have relatively low property prices compared to neighboring countries but it has a high-property tax rate which makes it a good market for real estate investors.
Fortunately, there are no restrictions on foreign nationals making investments in Belgium.
Belgium is a good investment opportunity due to its proximity to the rest of Europe and its low corporate and capital gains tax rates. As of 2017, the ESA does not plan to proceed with any extra regulations surrounding robo advising activity.
Apparently, the ESA does not think that the impact of robo advising is limited and that not immediate action is necessary. That does mean that things could change in the future though.
Robo Advisors in Australia
Australia has a booming economy and one of the best real estate markets in the entire world. The Australian economy is marked by sound monetary policy, innovation, and a stable government and economy.
Australia does have a rather high capital gains tax (that maxes out at 47%) but it has other healthy regulatory policies that contribute to stable business growth.
Some of the most popular robo advising services in Australia include:
- Ignition Wealth
- Quiet Growth
Australia has recently implemented strong financial regulations to protect consumers. According to these policies, financial advisors have a duty to act in the best interest of their clients, though it is not clear how this rule will apply to robo investors in the long term.
In the short term though, the Australian robo advising industry is growing as more companies enter the market every year. In 2015, Ignition Wealth became the first Australian robo advising firm to obtain its own Australian Financial Services License. Hopefully, this success paves the way for the successful integration of robo advising services into the Australian economy.
Robo Advisors Outside the US: Final Thoughts
Foreign investments are generally a good idea for diversifying your portfolio. While there is no such thing as a truly “international robo advisor”, there are many countries where using robo advisors have some nice tax advantages. Allocating a portion of your robo advisor portfolio to foreign stock can be a wise investment choice.